Good morning and welcome to Horizon Technology Finance’s Second Quarter 2018 Conference Call. Today’s call is being recorded. All lines have been placed on mute. We will conduct a question and answer session after the opening remarks. Instructions will follow at that time.

I would now like to turn the call over to Megan Bacon of Horizon for introduction and the reading of the Safe Harbor statement, please go ahead..

Thank you, and welcome to the Horizon Technology Finance second quarter 2018 conference call. Representing the company today are Robert Pomeroy, Chairman, Chief Executive Officer; Gerry Michaud, President; and Dan Trolio, Chief Financial Officer.

Before we begin, I’d like to point out that the Q2 earnings press release and form 10Q are available on the company’s website Horizontechfinance.com. Now I will read the following Safe Harbor statement.

During this conference call, Horizon Technology Finance will make certain forward-looking statements, including statements with regard to the future performance of the company. Words such as believes, expects, anticipates, intends, or similar expressions are used to identify forward-looking statements.

These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions.

Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are detailed in the Risk Factor discussion in the company’s filings with the Securities and Exchange Commission, including the company’s Form 10-K for the year ended December 31, 2017.

The company undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. At this time, I would like to turn the call over to Rob Pomeroy..

Good morning and thank you all for joining us. During the second quarter, we made progress implementing our strategies to achieve the goals that we laid out on last quarter’s conference call.

Specifically, we capitalized on the robust demand for our venture debt products to grow both our portfolio and committed and approved backlog, with an emphasis on credit quality. We also continue to proactively manage the credit quality of our existing portfolio and ended the quarter with no loans on non-accrual.

Finally, we took important steps to enhance our liquidity and growth potential, during the time when we continue to maintain one of the highest yielding floating rate loan portfolios in the BDC industry. We will discuss each of these accomplishments on today’s call.

For the quarter, we earned net investment income of $3.3 million or $0.29 per share, representing our second consecutive quarter of NII improvement and reflecting the earnings power of our larger investment portfolio.

Our debt portfolio yield for the second quarter was 15.3%, taking into consideration our normal portfolio interest, as well as liquidity events from three portfolio companies, including the success fee we received following the acquisition of one of our technology portfolio companies, MediaBrix.

As we have discussed on previous calls, the pace of prepayments has normalized in 2018 relative to 2017’s higher levels. These levels will continue to present opportunities for accelerated income from liquidity events and a more stable portfolio in terms of size and earnings power.

We funded seven new loans in the second quarter of 2018, totalling $34 million, which enabled us to increase our portfolio by $15 million. Of note, we funded our first loan in our new joint venture during the quarter, and we will discuss the JV in more detail later on the call.

We continue to make progress during the quarter on the portfolios credit quality. In addition to having no loans on non-accrual at the end of the quarter, we had a reduction in the number of two-rated loans. We are starting to see some activity in the technology market for M&A that has improved the prospects for our portfolio companies.

Specifically, our portfolio company MediaBrix was acquired in Q2. And another one of our portfolio companies has entered into a definitive agreement to be acquired, which they expect to consummate in Q3.

We experienced a slight decrease in our net asset value of $0.05 per share due to the decline in the value of our public warrants during the second quarter, and our distributions slightly exceeding our net investment income.

Our focus is on growing NAV over time, and I would highlight that the fair value of our loan portfolio increased during the quarter, primarily due to the improved outlook of our two-rated credits. Turning to our distributions, Horizon has declared monthly distributions for October, November and December of 2018, totalling $0.30 per share.

It has always been our practice to set our distributions at a level that can be covered by net investment income over time. We currently maintain $0.05 per share of undistributed spill over in further support of this distribution level as we focus on continuing to grow our portfolio going forward.

The portfolio growth during the second quarter should impact income in the second half of the year as the majority of that growth funded late in the quarter. Building on the success we had in April, extending and increasing our KeyBanc facility, we took important steps to further increase our liquidity and enhance our growth potential.

In June, we established a joint venture, Horizon Secured Loan Fund I LLC, which is owned and controlled on an equal basis by Horizon and Arena Investors, a global investment firm. In addition, New York Life Insurance Company will provide an initial $100 million debt facility.

Dan will provide more detail later on the call, but I would like to provide a brief overview of our joint venture and its benefits. The joint venture positions Horizon to expand our venture lending brand and market position alongside the strong strategic partners of Arena and New York Life.

It also positions us to diversify our investments and achieve attractive economics, while maintaining a strong emphasis on credit quality.

We believe our joint venture is well positioned to build the sizeable, high-yielding investment portfolio that contributes to Horizon’s income stream on an ongoing basis, and increases our ability to capitalize on compelling venture lending opportunities.

Now that we’ve funded our first loan in the JV, we expect to continue to populate the JV over the next several quarters. By the third or fourth quarter of this year, we expect to reach certain investment thresholds that will enable us to access increasing levels of leverage.

We expect that the JV will start to contribute to Horizon’s NII later this year, with the full impact felt in 2019. On the last call, we briefly mentioned the legislation that passed allowing BDCs to lower their asset coverage ratio, and the potential for increased returns for Horizon’s shareholders.

On June 7, 2018, our Board unanimously approved the application of the modified asset coverage requirements to the company as set forth in the Small Business Credit Availability Act.

As a result of receiving board approval and effective June 7, 2019, the company's asset coverage requirements for senior securities will change from 200% equivalent to 1 to 1 debt-to-equity ratio to 150% equivalent to a 2 to 1 debt-to-equity ratio.

Horizon intends to extend our existing venture lending strategy of providing senior secured loans to well sponsored development stage companies in the life science and technology markets, rather than alter that strategy.

At the yields we are able to achieve in this market the increased leverage even at moderate levels of leverage can produce improved return on equity for our shareholders. We also intend to submit a proposal to shareholders to approve expediting our ability to utilize higher leverage.

If approved, the company would become subject to the 150% asset coverage requirement the day after such shareholders' approval. Upon the effectiveness of the lower asset coverage ratio, our intention will be to moderately increase our leverage overtime from our existing target leverage of 0.75 to 1 toward a target leverage of 1 to 1 to 1.2 to 1.

In summary, the second quarter of 2018 was a positive one for Horizon as we grew the portfolio, improve credit quality, increased NII for the second consecutive quarter and took steps to enhance our ability to take advantage of growth opportunities.

We remain committed to growing our portfolio and earnings power with a focus on credit quality and providing shareholders with distributions and upside potential from our warrant and equity positions.

I will now turn the call over to Jerry, who will update on our business development efforts and market environment, and then to Dan who will detail our operating performance and financial condition..

Thanks, Rob. Good morning, everyone. During the second quarter, we reached a milestone for Horizon of over $1 billion in loans funded as a public company. We originated seven new floating rate loans totaling $34 million.

We also closed $52 million in new loan commitments including our first loan in our new JV and ended the quarter with a committed and approved backlog of $31 million. This includes $29 million at Horizon and $2 million at the JV.

With a continued emphasis on pricing discipline, we achieved strong onboarding yields of 11.9% and generated a loan portfolio yield of 15.3% for the quarter. Horizon has consistently had one of the highest yielding debt portfolios in the BDC industry and average portfolio yield of 14.6% since inception.

This highlights Horizon's strategic expertise in pricing and structuring transactions with our prepayment fees and ETPs in order to maximize returns when our portfolio companies exit our loan portfolio.

Consistent with the transactions we funded in the prior two quarters, we added investments in the second quarter with the potential for higher prepayment fees and with new ETPs as we replaced edged investments that had lower prepayment fees and significantly accredited ETPs.

As a result, as we have mentioned on prior calls, we now have a larger portfolio with enhanced prepayment fee and ETP potential, as well as a more predictable interest income stream from newly originated transactions in their interest only periods.

At the end of the quarter, we held warrant and equity positions in 77 portfolio companies with a fair value of $11 million. We experienced liquidity events during the quarter from three portfolio companies, 9 Point Medical, Media Bricks, and Silk Road Technology totaling $14 million in prepayments.

We continue to hold a warrant and a potential success fee in 9 Point and a potential success fee in Silk Road. Subsequent to the end of the quarter, we funded two additional loans totaling $7 million and were awarded two new transactions totaling $30 million.

As of today, we have a committed and approved backlog of $24 million to seven companies and a pipeline of new opportunities of over $350 million. Turning now to the venture capital environment, VC investment remains at record highs.

During the second half of 2018 $58 billion was invested in VC-backed companies, which exceeds the full year total for 6 of the past 10 years. While the number of Unicorn financings continue to grow, there is an upward shift in deal size across all stages of investments.

For example, early stage deals between $10 million and $25 million are on a pace to surpass $10 billion in aggregate deal value this year for the first time according to Pitch Book. First round VC investments increased for the second consecutive quarter with 35% of VC investments going into first round investments.

We view these trends as a very favorable indication of new company formation and potential debt prospects in future quarters. In terms of fund raising, after a relatively slow start in 2018, we saw an uptick in the second quarter with almost $11 billion raised. 2018 is now on pace to surpass 2017 totals and fund raising shows no signs of slowing.

VC-backed exit activity is beginning to show encouraging signs. As we mentioned last quarter, the pace of exits has increased due to more IPO activity and corporations having more cash available for acquisitions from Tax Reform, Pharma and biotech having especially robust quarter in terms of IPO activity, which bodes well for Horizon.

The IPO market allows VCs to cash-out after a lengthy investment period, sometimes up to 10 years, during which their funds are inaccessible. And we now are seeing these investors following IPOs redeploying their cash and investing in earlier stage companies, especially in the life sciences, which we believe is a positive for Horizon.

Turning now to our core markets, in the second quarter, the life science market remained very strong with solid demand for equity and debt. Activity in this market has been primarily driven by the capital needs of development stage drug development companies.

As discussed, the public market’s recent strength and investor familiarity with the biotech business model has opened the door for more IPOs. VC-backed biotech companies are taking advantage of the opportunity.

Horizon completed a funding for Celsion Corporation, a publicly traded biotech company with a pipeline of drug candidates related to oncology in the second quarter. Healthcare technology is a growing market sector for both debt and equity.

In our own healthcare portfolio, we completed a transaction in June to finance Catasys, a healthcare company that uses Big Data information to treat patients with behavioral. And already in Q3 we funded transactions for MacuLogix, which has an FDA approved instrument for early detection of age-related macular degeneration and curable eye disease.

Regarding the broader technology sector, the overall market remains very active. Horizon funded New Signature and Brook [ph] Wireless in the second quarter, two technology-related companies with strong revenue growth potential.

Internet companies once again represented a large VC funding sector during the quarter with $9 billion raised according to Money Tree. Certain technology segments, particularly artificial intelligence are receiving notable attention. Funding to U.S. based AI companies rose 21% in the second quarter to $2.3 billion after a 37% rise in the first quarter.

Now to the venture debt competitive landscape. The environment in the second quarter was consistent with what we have experienced in prior quarters. Despite competition in all of our markets, particularly life sciences, we continue to see and win quality investment opportunities with attractive onboarding yields.

As noted previously, the life science IPO market has shown signs of sustained strength, which creates competition for our debt, as well as for exits. Additionally, based on very strong VC investment in the second quarter and the preceding quarters, we expect continued opportunities to provide debt financing to growth-oriented VC-backed companies.

As we progress through the year and building on our growth in the second quarter, remain well positioned to provide growth capital to innovative companies in our core markets.

Our priority is to capitalize on attractive venture loan activity, while maintaining pricing discipline in order to achieve strong onboarding yields and upside exposure through ETPs, prepayment fees, equity and warrant positions. With that update, I will now turn the call over to Dan..

Thanks, Gerry, and good morning, everyone. I will now briefly discuss our financial results for the second quarter of 2018. Horizon earned total investment income of $7.3 million for the second quarter of 2018 as compared to $5.9 million for the second quarter of 2017.

The increase was due to higher interest income on our investments given the larger average size of our loan portfolio and an increase in one month LIBOR, which is the base rate for most of our variable rate debt investments.

For the second quarter, we achieved onboarding loan yields of 11.9% compared to 13.1% in the first quarter and consistent with our historical performance. Our loan portfolio yield was 15.3% for the second quarter of 2018 compared to 14.7% for the last year’s second quarter.

Turning to our expenses, total net expenses for the second quarter were $4 million compared to $3.1 million in the second quarter of 2017. Interest expense increased year-over-year to $1.5 million, compared with $1.1 million in the prior year period. This change was primarily due to an increase in the average borrowing.

Base management fee increase year-over-year to $1.1 million, compared with $0.9 million in the prior year period. This change is primarily due to an increase in the average size of our investment portfolio. In addition, we recorded $823,000 of incentive fee expense in the second quarter of 2018.

As previously mentioned, in March of 2018, the Advisor irrevocably waived the receipt of incentive fees related to the amounts previously deferred and it may be entitled to receive under the investment management agreement for the 2018 year.

During the second quarter of 2018, the Advisor waived performance based incentive fees of $160,000, which the advisor would have earned otherwise. Net investment income was $0.29 performance share for the second quarter, compared with $0.24 per share in the second quarter of 2017 and $0.28 per share for the first quarter of this year.

After paying distributions of $0.30 per share, and earning $0.29 per share for the quarter, the company’s undistributed spillover income as of June 30th was $0.05 per share. Our NAV as of June 30th was $11.60 per share as compared to $11.65 in the prior quarter.

The decrease was due to a decrease in the fair value of our public warrants and distributions that exceeded our net investment income. Summarize our portfolio activities for the second quarter, new originations totaled $34 million. We drop that by $5 million in scheduled principal payments and $14 million in principal prepayments.

We ended the second quarter of 2018 with investment portfolio of $226 million, which includes debt investments in 33 companies with an aggregate fair value of $203 million, a portfolio warrant and equity position in 77 companies with an aggregate fair value of $11 million, other investments in four companies with an aggregate fair value of $8 million, and equity interest in our JV, with an aggregate fair value of $4 million.

As we've discussed in the past almost 100% of the outstanding principal amount of our debt investments bear interest at floating rates with coupons that are structured to increase when interest rates rise.

Considering that, we believe Horizon is well positioned to benefit from a rising rate environment and experience both increasing income and expanding net interest margin. Looking at our liquidity, Horizon ended the quarter with $31 million in available liquidity.

This includes $11 million in cash and $20 million in funds available under our existing credit facility. As of June 30th, we had $68 million outstanding under our credit facility with KeyBanc.

In April, we amended the KeyBanc facility to increase the aggregate commitments to $100 million and extended the revolving period to April 6, 2021 and the maturity date to April 6, 2023. As Rob mentioned, we also took steps to enhance our liquidity position going forward.

In addition to receiving the Board’s approval to increase our debt-to-equity ratio to 2 to 1 and the proposal we intend to submit to shareholders we established a new joint venture, expanding Horizon venture lending brand and enhancing growth opportunities.

The newly formed joint venture is owned and controlled on an equal basis by Horizon and Arena investors. Each of Horizon and Arena has initially committed to provide up to $25 million of equity to the joint venture, and collectively intend to contribute equity capital in the aggregate of up to $100 million.

In order to enhance our JV capacity to pursue attractive origination activities, New York Life Insurance Company has provided an initial $100 million senior secured debt facility, which may be increased to $200 million with a mutual agreement of the JV and New York Life.

This facility has a two year investment period followed by a five year amortization period. Lastly, I'd like to note that we plan to hold our next conference call to report third quarter 2018 results during the week of October 29th. This concludes our opening remarks. We'll be happy to take questions you may have at this time..

[Operator Instructions] Your first question comes from the line of Chris Kotowski from Oppenheimer. Your line is open..

Yes, I wonder if you could share a few more details about the JV, and in particular, I mean, it sounds like it has 1 to 1 leverage and I guess why bother putting something into a JV, if you have only 1 to 1 leverage and actually you can have more leverage in that at the BDC now.

And also are they going to be the same kinds of investments or do you expect it to broaden out the range of companies that you invest in, or the types of investments you make?.

Yes, so Chris hi, this is Jerry. So, our model has always been prior [ph] public, but certainly been is probably something we talked about this regularly, that when we enter into large transactions, especially on life science side, we do in fact participate with some of the best players in the marketplace.

And historically the way that has worked is we will originate the deal and underwrite the deal and then at some point figure out how much of a concentration level we think is appropriate for the public company. And then we will bring in a partner to take the risk of that deal and historically that’s what we have done and that’s worked fine.

With the exception, that we obviously lose the economics on whatever portion of the transactions we give away, that’s just the way our participation market works.

So as it relates to the joint venture, what it gives us -- gives our investors the opportunity to do is, in addition to sharing and obviously participating in the income portion of deal that we do we now get -- can get distributions from a portion of the transaction that goes into the JV, that we would have otherwise maybe participated out with third-party participant.

So we thought, just from that position alone, it was a very attractive vehicle. And then of course, we -- today we have certain leverage ratios that we are trying to stay within. And so, this helps us during that period as well..

And Chris, this is Dan. I’d just like to add to respond to your first question. That facility that we have with a JV allows us to leverage up to 2 to 1 in the facility. So it’s $100 million commitment with 2 to 1 leverage growing into that 2 to 1 leverage..

Okay. And I guess, I am trying to think of how to phrase the question, but in terms of the fee waivers, obviously that was important in getting close to covering the dividend.

Can you share your thoughts about the future incentive fee waivers?.

So, just to be crisp about this, we waived the recoupment of the previously deferred fees during the calendar year 2018. There was no other negative impact on the management fee from the fee cap and deferral mechanism in the second quarter..

Okay, alright. That’s it for me, thank you..

Your next question comes from the line of Ryan Lynch from KBW. Your line is now open..

Good morning..

Good morning..

Sorry about that. Thanks for taking my questions. First one, I wanted to talk about kind of the strategies and I think I know the answer of this, but I just want to make sure that I am clear on it.

For both of your strategies for the 2 to 1 leverage the incremental leverage that you’re going to add to your balance sheet as well as the strategy for funding investments in the JV.

Are you going to use the same strategy that you currently use to fund investments on your balance sheet, or do you guys intend to try to focus on more senior secured lower yielding, lower risk investments for both those kind of strategies..

Yes, it’s definitely the former. There is no real strategy shift here at all or refocus. I will say as we’ve said on every conference call, we have been continually working on improving the quality of the -- credit quality of the portfolio seeking higher and higher quality transaction as we go forward and we think that this is a way to do that.

There is no intention to go to a different product or class of investing..

Okay. And then as far as the additional leverage on your balance sheet, you set a target leverage range of 1 to 1.2 times debt-to-equity, if we look at the upper end of that, that’s about $50 million of additional debt capacity to use that upper end of the range.

How do you guys plan on funding that, if I look at you guys credit facility, you guys could draw down further on that. But I think you guys would still need some additional capacity beyond what’s currently allowed on your credit facility.

So how do you plan on funding the additional assets that you plan to lever up your balance sheet with?.

Yes, so our intention is to do that is to build towards those that target range overtime. There are few important steps that have to happen first, we have to actually get -- if we are going to expedite this before June of next year we have to actually get the shareholder approval.

Otherwise, we’ll look forward -- we have the capacity to get pretty close to one-to-one with the existing long-term debt that we have fixed rate and the buying with KeyBanc.

So we’ll be looking as we go later into the year to strategize about where we think it would be most effective for us to add any additional cushion of debt capacity, but that’s probably a mid-2019 event..

Okay, thanks that’s all my questions..

Your next question comes from the line of Christopher Testa from National Securities. Your line is open..

Hey, good morning guys. Thank you for taking my questions. Just another one on the JV, I know that you guys were saying that you get enhanced economics from being able to take larger commitment sizes to larger companies with your partner.

Just generally speaking, how does a size of a company in the JV going to differ if at all from the size of the company you would fund on balance sheet?.

Yes, so really it does and it goes back to what I was saying before, the way we would do that historically is we were just find a participant for any part of a transaction that we felt was too large to put on our balance sheet. And we would just -- we would participate that part out.

And so form an investor standpoint you wouldn’t really see that part of that, I mean you’d see if it was a $25 million deal. But let’s say we just split it 50:50 then you’d been really on our balance sheet the only thing that would be evident would be the $12.5 million.

And now we have an opportunity through the JV to take some of the economics that we historically have kind of given away, but in terms of size of transaction, we don’t have to change our strategy at all. These are the exact kind of transactions that we have been seeing in our pipeline really since we’ve gone public.

This just gives us a greater capacity and ability to take advantage of them..

Got it, okay. No, that’s helpful and makes sense.

And will HRZN actually be holding some pieces of these on balance sheet as well, will this be co-investing or will these be two totally separate portfolios?.

So the way -- first you will think about it as it’s another investment platform for Horizon and we do our same due diligence, our investment strategy. And so there is a possibility that Horizon will be holding pieces of the same investments that’s in the joint venture..

Got it.

But it’s not formulae that that it will always have a piece of what’s originated between you guys and Arena in that vehicle?.

That is correct..

Okay, got it. And I might have missed a little of this I'm sorry I know you were answering Ryan’s question. On the right hand side of your balance sheet the current key facility only goes one-to-one.

So you guys -- you’re expecting maybe mid to late-2018 decision on maybe adding another revolver or amending that’s a 2 to 1 or possibly issuing some other debt is that the right way to look at that?.

Yes, the response of the question was that we have the capacity now to get to one-to-one we’ll be looking for additional ways to do that. But all of that is relying upon the shareholder approval or June of 2019. So yes, so we would be looking at that later this year, just put it that way..

Got it. Okay. And assuming you guys get the shareholder approval, I mean, I'm sure that you’ve been doing your diligence on this.

So how the discussion has been with whether it’s KeyBanc or another bank how have the banks kind of responded you guys not only increasing the balance sheet leverage, but also the economic leverage for now with the SLF as well?.

Yes, so we’re obviously always in constant contact with our lenders and the way they look at it is they look at their facility and the structure of their facility and they’re comfortable with that as you know it’s a separate entity and SPV. So they’re comfortable with the structure, they like the structure and they’re fine with our strategy..

Okay, alright that’s all for me. Thank you guys for taking my questions..

Thanks, Chris..

Your next question comes from the line of Robert Dodd from Raymond James. Your line is open..

Hi, guys. Another one on the JV, I mean, you mentioned it in the prepared remarks that by the end of the year towards the end of the year Q3-Q4 you’d be able to touch on that leverage and it start to add to NII and then talked about 2019.

Can you give us any call on when do you expect that JV to be generate earnings that are incremental to ROE rather than -- I mean, generating some NII is great, but potentially a drag in the near-term, certainly was this quarter.

When is it accretive to ROE for the overall business?.

What I said in the comments Robert, is that we expect to access the first levels of the leverage probably late third quarter early fourth. And then, as we populate to add and get the concentration to certain level we’ll get to the point where the leverage exceeds, the one-to-one leverage.

And so we will start to see incremental NII contribution from the JV probably late this year, early next..

Right. But just -- so that’s by incremental NII, you mean incremental above what you -- yes got it okay. And then just to clarify on the incentive fees waiver here, this was just to do with the previous commitment you’d made to waive previously.

So, is it fully caught up or are we goanna continue to see this for the rest of the year as various things play out and things true up?.

We don’t give guidance, but, what I have said previously is that based on the formula, there would be the opportunity to recoup some previously differed piece in the third and fourth quarter that’s subject to no adverse change in the portfolio.

And when that happens, we will not take those that recoupment and those fees will therefore become permanently waived..

Right, got it. And then, just getting almost back to Chris’s question on leverage, obviously we don’t ahead of the shareholders, whether they are going to approve the rule and tough getting votes for anything for BDC, good idea or not.

What would you say -- what’s your target leverage ahead of either getting shareholder approval or June next year where your approval obviously kicks in from the Board? I mean, are you willing to take a higher level of leverage in the run up to that knowing that a worst June next year, you’ve got approval to go above one-two-one..

Our target leverage has always been 0.75 to 1. I think that that really is more like a range of 0.7 to 0.8. But, we don’t plan to go to 0.9 and 0.95, as we get to the finish line. We’ll be hopeful and that we will get approval sometime late third early fourth quarter from the shareholders and then we will take action to move towards the higher level..

Got it. And then one last one, if I can, on the yield, I mean, obviously last quarter your annualized portfolio yield on debt was 14%, for this quarter 15.3%, and is 90 basis points up obviously rates moved in your favor.

That was the success fee et cetera, but that still seems like a large increase given your prepaid fees, et cetera were accelerated amortization et cetera wasn’t particularly up. So, can you give us any more color on, I could explain may be half of that.

Why such a big pick up?.

You actually answered the question with some of the things you said. So, remember that the prepayment fee is separated as the line item of income, separate from interest income, included in interest income is accelerated end of term payments and success fees..

Yes. But that was only $100,000 from the first quarter according to the cash flow statement, right? So, unless I did the math well or according to the MD&A, which discloses $1.4 million in the second quarter it was $1.3 million in the first. So that’s relatively small..

I don’t have all the information in front of me, but it probably has more to do with the weighted average portfolio size, when you divide it..

Got it. Okay, thank you..

Your next question comes from the line of Casey Alexander from Compass Point Research. Your line is open..

Hi, good morning. Gerry, I was listening to your presentation and I’m not sure, I understood something quite correctly, I thought you were indicating that you have sort of an underwriting strategy with slightly lower onboarding yields in order to compensate for that with a higher prepayment fee that you've been getting in the past.

Did I get that right?.

No, but you've got the components kind of right. When we underwrite a transaction Casey, as it relates to the structure and pricing of the transaction, we're not just looking at the onboarding yield for the company we're looking at where the company is positioned on its kind of exit curve.

Is it at the beginning, is it -- are we close to a company that's going to be exiting the market through IPO or M&A in next 12 months. And we try to position our overall pricing in a way that we maximize the value of the transaction.

And I only get too much, because there is some art to this that actually helps us from a competitive standpoint in the marketplace.

But we actually look at how we can maximize the value of that transaction on an IRR basis for our investors that can be unique beneficial to the company and enhances the value for the shareholder beyond just what the onboarding yield is.

So if it a transaction, where we don’t see a whole lot of upside from a warrant or the ETP, then we might have a -- in fact to your point we have a higher onboarding just interest rate.

But if we do believe that there is going to be an exit in a relatively short period of time, and we have a say a 48 month transaction, and we put a very big ETP at the end of that knowing or there is obviously some risk to any kind of pricing.

But with the opportunity to pull that ETP forward, because we believe it will be an exit in let’s say the next 12 to 18 months that can create significant value in the transaction. And yet from the company's perspective, the value alone is good and the interest rate they're paying is competitive..

Okay. So it's sort of a linear assessment of where you are in the lifecycle of the company that depends upon how you weight the front end versus the backend..

That is correct..

How many companies does Horizon have in the portfolio that have currently filed for IPOs?.

I don't believe, we have any that have announced that they have filed for IPOs..

Okay.

In the JV, does Arena have -- I mean, first of all does the JV get a look at every deal that Horizon underwrites?.

So, the JV works like I call out a JV, there is a four person board members from two people from each member. There is no obligation to provide an investment by each member to the JV, but we've agreed to show the each investment to the JV..

You've agreed to show each investment to the JV.

And Arena can veto anything and keep it from going into the portfolio, is that correct?.

It's like I said it's a four person Board and four person Board members has unanimous boarding contents, yes..

Okay. If I understand the discussion correctly, the point to the JV is for Horizon to ultimately end up taking bigger slices of deals than they have in the past. I'm not sure I understand the point of the JV if the company is already authorized the resolution to expand the leverage.

If the company wants to take larger pieces and more risk of transactions, why not just do it on balance sheet..

I think the answer to that Casey in our market especially in the life science and healthcare market given the growth and everything that we're seeing in that marketplace is having both as it gives us a distinct advantage. Because, there is the issue of how much -- of any transaction how much do you want to put on your own balance sheet.

And then there is the issue of having a partner, which we always have partners. There is question of whether we get any benefit from that partner other than helping us to get the transaction done. Do you want to have a partner that helps us mitigate concentration issues within our portfolio.

So just because we can’t do a $30 million transaction, because we have a higher levels of interest it might be beneficial to us, because we have 10 of those transactions we're looking at to spread those that risk over more of the transactions, do more of them and has less concentration on our own balance sheet.

And yet get some of the economic benefit of sharing the transaction with another partner and in this case our JV..

Okay, alright. Thanks for taking my questions..

Sure..

Thank you. There are no further questions. I would now like to turn the call back to Robert Pomeroy, Chairman and CEO for closing comments..

Thank you all for joining us this morning. We appreciate your continued interest and support in Horizon. And we look forward to speaking with you again in October. This will conclude the call..

Ladies and gentlemen, as stated, this does conclude today’s conference. Thank you for your participation and have a wonderful day. You may now disconnect..